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Chapter 1
Contents
CCP Supremacy Over the State,
the PLA, and the Economy
Biological Warfare
Space Technology
Military Information Technology
Laser Weapons
Automation Technology
Nuclear Weapons
Exotic Materials
The 16-Character Policy: 'Give
Priority to Military Products'
The PRC's Use of Intelligence
Services to Acquire U.S. Military Technology
The 'Princelings'
Acquisition of Military Technology
from Other Governments
Russia
Israel
The United States
Joint Ventures with U.S. Companies
Acquisition and Exploitation of
Dual-Use Technologies
Front Companies
Direct Collection of Technology
by
Non-Intelligence Agencies and Individuals
Illegal Export of Military Technology
Purchased in the United States
PRC Purchase of Interests in U.S.
Companies
Methods Used by the PRC to Export
Military Technology from the United States
PRC Incentives for U.S. Companies
to
Advocate Relaxation of Export Controls
Chapter 1 Summary
his chapter describes the methods by which the PRC attempts to
acquire U.S. technology for military purposes. The types
of technology and information that the PRC and individual PRC
nationals have attempted to acquire, however, are far more broad.
The PRC appears to try to acquire information and technology
on just about anything of value. Not all of it, by any means,
presents national security or law enforcement concerns.
The PRC's appetite for information and technology appears
to be insatiable, and the energy devoted to the task enormous.
While only a portion of the PRC's overall technology collection
activities targeted at the United States is of national security
concern, the impact on our national security could be huge.
The Select Committee has discovered evidence of a number
of their successes. Given the size and variety of the PRC's
overall effort, and the limited U.S. resources and attention
devoted to understanding and countering its unlawful and threatening
elements, there is clear cause for concern that other serious
losses have occurred or could occur in the future.
It is extremely difficult to meet the challenge of the
PRC's technology acquisition efforts in the United States
with traditional counterintelligence techniques that were applied
to the Soviet Union. Whereas Russians were severely restricted
in their ability to enter the United States or to travel within
it, visiting PRC nationals, most of whom come to pursue lawful
objectives, are not so restricted. Yet the PRC employs all types
of people, organizations, and collection operations to acquire
sensitive technology: threats to national security can come from
PRC scientists, students, business people, or bureaucrats, in
addition to professional civilian and military intelligence operations.
In light of the number of interactions taking place between
PRC and U.S. citizens and organizations over the last decade
as trade and other forms of cooperation have bloomed, the opportunities
for the PRC to attempt to acquire information and technology,
including sensitive national security secrets, are immense.
Moreover, the PRC often does not rely on centralized control
or coordination in its technology acquisition efforts, rendering
traditional law enforcement, intelligence, and counterintelligence
approaches inadequate. While it is certainly true that not all
of the PRC's technology acquisition efforts are a threat to U.S.
national security, that very fact makes it quite a challenge
to identify those that are.
While this report, this Select Committee, and the nation's
counterintelligence organizations are focused on national security
issues, it is thus necessary to understand the full range of
the PRC's technology acquisition effort to discern its threatening
aspects.
Chapter 1
Text
COMMERCIAL AND INTELLIGENCE OPERATIONS
PRC ACQUISITION OF
U.S. TECHNOLOGY
The Structure of the PRC Government
he political, governmental, military, and commercial activities
of the People's Republic of China are controlled by three directly
overlapping bureaucracies: the Communist Party, the State, and
the People's Liberation Army.
Foremost of these, and in ultimate control of all state, military,
commercial, and political activities in the PRC, is the Chinese
Communist Party (CCP).1 The Communist Party Secretary, Jiang
Zemin, chairs both the Politburo and its powerful executive group,
the Politburo Standing Committee. The Politburo, in turn, is
supported by the CCP Secretariat.
The State governmental apparatus is under the direct control
of the Communist Party Secretary, Jiang Zemin, who in his role
as President serves as the official head of the State as well.
Subordinate to the CCP Secretary in state affairs is the State
Council, presided over by Premier Zhu Rongji, also a high-ranking
member of the Communist Party.
The People's Liberation Army (PLA) is also directly under
the control of the Communist Party. The top level of PLA authority
is the CCP's Central Military Commission (CMC), of which Jiang
Zemin, the CCP Secretary, is also the Chairman. The CMC's routine
work is directed by its two Vice-Chairmen, Generals Zhang Wannian
and Chi Haotian.
The 24-member CCP Politburo,2 which ultimately controls the
PRC's political, military, governmental, and commercial activities,
does not usually conduct its business as a whole. Rather, due
to its unwieldy size and membership consisting of persons from
outside Beijing, the Politburo acts through its powerful seven-member
Standing Committee. Involvement by the entire Politburo in specific
decisions normally occurs when there are major policy shifts,
crises need to be addressed, or formal legitimization of a particular
policy is necessary.
In contrast, the seven most senior members of the Communist
Party Politburo, comprising the Politburo Standing Committee,
meet frequently. The CCP Politburo Standing Committee wields
the real decision-making power in the PRC.
The Communist Party Secretariat officially serves as staff
support to the Politburo and oversees the implementation of Politburo
decisions by State bureaucracies. The Secretariat is composed
of seven members of the Politburo and is an executive rather
than a decision-making body. The current ranking member of the
Secretariat is Vice-President and Standing Committee member Hu
Jintao.
The State Council, the top level of the PRC State governmental
apparatus, consists of the Premier, Vice Premiers, State Councilors,
and Secretary and Deputy Secretaries General. It directs the
activities of all State ministries, commissions, and offices.
The Communist Party's
eight-member Central Military Commission (CMC) heads the People's
Liberation Army, which includes the PRC's army, navy, and air
force, as well as espionage operations conducted through
the Second Department of the PLA. The CMC has a powerful bureaucratic
status roughly comparable to that of the Politburo Standing Committee
and the State Council. It meets regularly to address administrative
matters and to formulate military policy and strategy.
In addition to their policy- and decision-making roles in
the CMC, key members of that body by virtue of their top
posts in the Communist Party also serve a bridging function
between the CCP, the State, and the PLA.
The CMC, a Communist Party body, has no equivalent in the
State sector. The State Central Military Commission, an organization
within the State bureaucracy, is theoretically a separate decision-making
body, but in reality it has no unique powers because its membership
generally mirrors that of the Party's CMC. The PRC's Ministry
of Defense, the principal State bureaucracy for dealing with
military affairs, is likewise composed of Communist Party CMC
members, and its role is primarily a ceremonial one. The domination
and control of the PLA by the Communist Party is thus complete.
COSTIND:
The CCP's Use of Corporations for Military Aims
The State Council controls the PRC's military-industrial organizations
through the State Commission of Science, Technology and Industry
for National Defense (COSTIND). The State Council has a decisive
role in Communist Party policy because of its function as interpreter,
implementer, and overseer of broadly-worded and often ambiguous
Politburo policy goals.
Created in 1982, COSTIND was originally intended to eliminate
conflicts between the military research and development sector
and the military production sector by combining them under one
organization. But its role soon broadened to include the integration
of civilian research, development, and production efforts into
the military.
COSTIND presides
over a vast, interlocking network of institutions dedicated to
the specification, appraisal, and application of advanced technologies
to the PRC's military aims. The largest of these institutions
are styled as corporations, notwithstanding that they are directly
in service of the CCP, the PLA, and the State. They are:
·
China Aerospace Corporation (CASC)
·
China National Nuclear Corporation (CNNC)
·
China North Industries Group (NORINCO)
·
Aviation Industries Corporation of China (AVIC)
·
China State Shipbuilding Corporation (CSSC)
Until 1998, COSTIND was controlled directly by both the CMC
and the State Council. In March 1998, COSTIND was "civilianized"
and now reports solely to the State Council. A new entity, the
General Armament Department (GAD), was simultaneously created
under the CMC to assume responsibility for weapons system management
and research and development.
CCP
Supremacy Over the State, the PLA, and the Economy
The PRC Constitution asserts the supremacy of the Communist
Party over all other government, military, and civilian entities.3
But the CCP also relies on other, more pragmatic methods to ensure
its primacy. The most evident and effective of these is having
senior CCP members in control of all State government bodies.4
The most obvious example of the Communist Party's practical
control of both the State and the PLA is Communist Party Secretary
Jiang Zemin's simultaneous service as State President and CCP
Central Military Commission Chairman. Other examples include
Zhu Rongji's simultaneous service as Politburo Standing Committee
member and Premier of the State Council, and Li Lanqing's dual
roles as Politburo member and Vice-Premier of the State Council.
In addition to the CCP Politburo's control of the PRC government
and military, there are hundreds of similar connections between
lower-level Communist Party officials and the State, military,
and commercial bureaucracies in the PRC. For example, 25 of the
29 Ministers in charge of Ministries and Commissions under the
State Council are members of the CCP Central Committee.
Nowhere is the supremacy
of the Communist Party more clearly enunciated than with the
PLA. This supremacy is explicitly set forth in the PRC Constitution.5
In addition, as with the State government, it is not just law
but common control that guarantees PLA compliance with the Communist
Party's dictates. The most obvious practical example of direct
Communist Party control of the PLA is Jiang Zemin's position
as Chairman of the Central Military Commission, and the entire
CMC's direct control of the PLA. Jiang is also the first Communist
Party Secretary to enforce CCP control over the military completely
by appointing no military officers to the powerful CCP Politburo
Standing Committee, although two officers remain on the Politburo.
The slogan "the Party controls the gun" is often
repeated in speeches by both CCP and PLA officials, serving as
a constant reminder of CCP supremacy over the military. A 1997
article in the official PLA newspaper, published in celebration
of Army Day, provided a typical example:
The Western hostile forces . . . have never given up their
plot to Westernize and disintegrate our country, and they always
try to infiltrate and corrode us by advocating the fallacies
of de-partyization of the army . . . in a vain attempt to make
our army shake off the Party's absolute leadership and change
its nature.6
Development of the CCP's Technology
Policies
The CCP Politburo addresses broad technology matters through
the Science and Technology Leading Group.7 This Communist Party
group is headed by the Premier and includes the Chairman of the
State Science and Technology Commission8 and the Minister of
COSTIND.
Broad technology policy directives originate in the upper
levels of the Communist Party hierarchy. It is up to the State
Council and its organs to fine-tune and implement those policies.
In addition, the State government, like the CCP itself, has a
number of Leading Groups, including a Science and Technology
Leading Group, that provide expertise and recommendations to
the State Council and its organs. A committee of approximately
50 R&D experts meets annually and provides policy planning
and technical advice to the Minister of COSTIND. COSTIND can
also call upon the many academies and institutes under its direction.
The State Council and its sub-units are also consumers of
military research conducted by the PRC's military research bureaucracy,
composed of numerous think-tanks that provide analysis on a wide
range of matters. This military research is channeled through
a State Council unit known as the International Studies Research
Center.
The Center acts as a conduit and central transmission point
to channel intelligence, research reports, and policy documents
to the top Communist Party leadership.9
The
863 and Super-863 Programs:
Importing Technologies for Military Use
In 1986, "Paramount Leader" Deng Xiaoping adopted
a major initiative, the so-called 863 Program, to accelerate
the acquisition and development of science and technology in
the PRC.10 Deng directed 200 scientists to develop science and
technology goals. The PRC claims that the 863 Program produced
nearly 1,500 research achievements by 1996 and was supported
by nearly 30,000 scientific and technical personnel who worked
to advance the PRC's "economy and . . . national defense
construction." 11
The most senior engineers behind the 863 Program were involved
in strategic military programs such as space tracking, nuclear
energy, and satellites.12 Placed under COSTIND's management,
the 863 Program aimed to narrow the gap between the PRC and the
West by the year 2000 in key science and technology sectors,
including the military technology areas of:
·
Astronautics
· Information
technology
· Laser technology
· Automation
technology
· Energy
technology
· New materials
The 863 Program was given a budget split between military
and civilian projects, and focuses on both military and civilian
science and technology. The following are key areas of military
concern:
Biological Warfare
The 863 Program includes a recently unveiled plan for gene research
that could have biological warfare applications.
Space Technology
Recent PRC planning has focused on the development of satellites
with remote sensing capabilities, which could be used for military
reconnaissance, as well as space launch vehicles.
Military Information Technology
The 863 Program includes the development of intelligent computers,
optoelectronics, and image processing for weather forecasting;
and the production of submicron integrated circuits on 8-inch
silicon wafers. These programs could lead to the development
of military communications systems; command, control, communications,
and intelligence systems; and advances in military software development.
Laser Weapons
The 863 Program includes the development of pulse-power techniques,
plasma technology, and laser spectroscopy, all of which are useful
in the development of laser weapons.
Automation Technology
This area of the 863 Program, which includes the development
of computer-integrated manufacturing systems and robotics for
increased production capability, is focused in the areas of electronics,
machinery, space, chemistry, and telecommunications, and could
standardize and improve the PRC's military production.
Nuclear Weapons
Qinghua University Nuclear Research Institute has claimed success
in the development of high-temperature, gas-cooled reactors,
projects that could aid in the development of nuclear weapons.
Exotic Materials
The 863 Program areas include optoelectronic information materials,
structural materials, special function materials, composites,
rare-earth metals, new energy compound materials, and high-capacity
engineering plastics. These projects could advance the PRC's
development of materials, such as composites, for military aircraft
and other weapons.
In 1996, the PRC announced the "Super 863 Program"
as a follow-on to the 863 Program, planning technology development
through 2010. The "Super 863 Program" continues the
research agenda of the 863 Program, which apparently failed to
meet the CCP's expectations.
The Super 863 Program
calls for continued acquisition and development of technology
in a number of areas of military concern, including machine
tools, electronics, petrochemicals, electronic information, bioengineering,
exotic materials, nuclear research, aviation, space, and marine
technology.
COSTIND and the Ministry of Science and Technology jointly
manage the Super 863 Program. The Ministry of Science and Technology
focuses on biotechnology, information technology, automation,
nuclear research, and exotic materials, while COSTIND oversees
the laser and space technology fields.13
COSTIND is attempting to monitor foreign technologies, including
all those imported into the PRC through joint ventures with the
United States and other Western countries. These efforts are
evidence that the PRC engages in extensive oversight of imported
dual-use technology. The PRC is also working to translate foreign
technical data, analyze it, and assimilate it for PLA military
programs. The Select Committee has concluded that these efforts
have targeted the U.S. Government and other entities.
If successful, the 863 Programs will increase the PRC's ability
to understand, assimilate, and transfer imported civil technologies
to military programs. Moreover, Super 863 Program initiatives
increasingly focus on the development of technologies for military
applications. PRC program managers are now emphasizing projects
that will attract U.S. researchers.
Since the early 1990s, the PRC has been increasingly focused
on acquiring U.S. and foreign technology and equipment, including
particularly dual-use technologies that can be integrated into
the PRC's military and industrial bases.
The
16-Character Policy: 'Give Priority to Military Products'
In 1997, the CCP formally codified the 16-Character Policy.
The "16-Character Policy" is the CCP's overall direction
that underlies the blurring of the lines between State and commercial
entities, and military and commercial interests. The sixteen
characters literally mean:
· Jun-min
jiehe (Combine the military and civil)
· Ping-zhan
jiehe (Combine peace and war)
· Jun-pin
youxian (Give priority to military products)
· Yi min
yan jun (Let the civil support the military)14
This policy, a reaffirmation and codification of Deng Xiaoping's
1978 pronouncement, holds that military development is the object
of general economic modernization, and that the CCP's main aim
for the civilian economy is to support the building of modern
military weapons and to support the aims of the PLA. The 16-Character
Policy could be interpreted, in light of other policy pronouncements
that subordinate military modernization to general economic modernization,
to mean a short-term strategy to use defense conversion proceeds
for immediate military modernization. Or it could mean a long-term
strategy to build a civilian economy that will, in the future,
support the building of modern military goods. In practice, however,
the policy appears to have meant a little of both approaches.15
The CCP's official policy on military modernization, as publicly
announced since the late 1970s by then-"Paramount Leader"
Deng Xiaoping, states that the PRC is devoting its resources
to economic development, and that military development is subordinate
to and serves that goal.16 But as Dr. Michael Pillsbury of the
National Defense University has testified publicly, the doctrinal
and strategic writings of many PLA leaders and scholars are inconsistent
with a subordination of military modernization efforts. In fact,
according to Pillsbury, these views are "surprising, and
perhaps even alarming." 17
General Liu Huaqing,
former Vice-Chairman of the CCP's Central Military Commission
and a member of both the Politburo and the Standing Committee,
stated in 1992 that economic modernization was dependent not
only on "advanced science and technology," but also
"people armed with it." Anything else was "empty
talk." 18
The PRC has indeed used the
profits from its burgeoning commercial economy to purchase a
number of advanced weapons systems. The most notable of these
include the purchase from Russia of 50 Sukhoi Su-27 jet fighters
and the production rights for 200 more, two Kilo attack submarines,
and two Sovremenniy missile destroyers.19
The PRC has also purchased weapons systems or their components
from Israel, France, Britain, and the United States, including
air-to-air
missiles, air-refueling technology, Global Positioning System
(GPS) technology, helicopter parts, and assorted avionics.20
In addition to providing funds for the purchase of U.S. and
foreign weapons systems, implementation of the 16-Character Policy
serves the PLA in other ways. Among these are:
· Funding
military R&D efforts
· Providing
civilian cover for military industrial companies to acquire dual-use
technology through purchase or joint-venture business dealings
· Modernizing
an industrial base that can, in time of hostility, be turned
towards military production
In this connection, since the 1980s significant portions of
the PRC military industry have diversified into civilian production.
The production of profit-producing civilian goods helps keep
the PRC military-industrial companies financially stable. The
majority of them have operated "in the red" for years,
bolstered only by extremely generous and forgiving loan arrangements
from the PRC's central banks.21
The blurred lines
between military and commercial technology that are the hallmarks
of the 16-Character Policy have also created some problems
for the PRC. An official in the State Planning Commission criticized
the 16-Character Policy for an insufficient focus on the most
advanced military technologies, particularly in aerospace, aviation,
nuclear power, and ship-building. At the same time, the official
acknowledged, military industries have been reluctant to share
economically valuable technologies with civilian enterprises.22
Pursuant to the 16-Character Policy, the PRC's emphasis on
the acquisition and development of military technology is closely
related to its interest in science and technology for economic
development. At times this has been reflected in tension between
modernizing the PLA and developing the economy. The PRC's approach
to resolving this conflict has been to seek "comprehensive
national power," in which high-technology industries, economic
growth, and military modernization are all interrelated.23
Despite the PRC's public claims, it is estimated that their
actual military spending is four to seven times greater than
official figures. During the 1990s, no other part of the PRC's
budget has increased at the rate of military spending. A large
portion of this budget is devoted to military research.24
The success achieved by the United States through the use
of high-technology weapons in the 1990 Gulf War led PLA leaders
to call for a reemphasis on military development. PLA leaders
began to call for military preparedness to fight "limited
war under high-tech conditions."
The PLA's call for more attention to military aims appears
to have had some impact. In a 1996 speech, Li Peng, second-ranking
member of the CCP Politburo, then-Prime Minister, and currently
Chairman of the National People's Congress,25 said:
We should attach great importance to strengthening the army
through technology, enhance research in defense-related science,
. . . give priority to developing arms needed for defense under
high-tech conditions, and lay stress on developing new types
of weapons.26
Communist Party Secretary Jiang Zemin, in March 1997, publicly
called for an "extensive, thoroughgoing and sustained upsurge"
in the PLA's acquisition of high technology.27 The PRC's 1998
Defense White Paper pointedly stated that "no effort will
be spared to improve the modernization level of weaponry."
28
The modernization of the PLA has placed priority on the development
of:
· Battlefield
communications
· Reconnaissance
· Space-based
weapons
· Mobile
nuclear weapons
· Attack
submarines
· Fighter
aircraft
· Precision-guided
weapons
· Training
rapid-reaction ground forces
These actions, supported by the PRC's overall economic growth,
will improve the PLA's military capabilities in ways that enable
the PRC to broaden its geographic focus. At the same time, the
PRC has shifted its military strategy towards rapid-reaction
mobility and regional, versus global, armed conflict. Under this
framework, the PRC's avowed military strategy is one of "active
defense," a capability for power projection to defend the
PRC's territorial ambitions, which extend to not only Taiwan,
but also the Senkaku Islands in the East China Sea, and the Spratly
and Paracel Islands in the South China Sea.
The
PRC's Use of Intelligence Services
To Acquire U.S. Military Technology
The primary professional PRC intelligence services involved
in technology acquisition are the Ministry of State Security
(MSS) and the PLA General Staff's Military Intelligence Department
(MID).
In addition to and separate from these services, the PRC maintains
a growing non-professional technology-collection effort by other
PRC Government-controlled interests, such as research institutes
and PRC military-industrial companies. Many of the most egregious
losses of U.S. technology have resulted not from professional
operations under the control or direction of the MSS or MID,
but as part of commercial, scientific, and academic interactions
between the United States and the PRC.
Professional intelligence agents from the MSS and MID account
for a relatively small share of the PRC's foreign science and
technology collection. The bulk of such information is gathered
by various non-professionals, including PRC students, scientists,
researchers, and other visitors to the West. These individuals
sometimes are working at the behest of the MSS or MID, but often
represent other PRC-controlled research organizations - scientific
bureaus, commissions, research institutes, and enterprises.
Those unfamiliar with the PRC's intelligence practices often
conclude that, because intelligence services conduct clandestine
operations, all clandestine operations are directed by intelligence
agencies. In the case of the PRC, this is not always the rule.
Much of the PRC's intelligence collection is independent of MSS
direction. For example, a government scientific institute may
work on its own to acquire information.
The MSS is headed
by Minister Xu Yongyue, a member of the CCP Central Committee.
The MSS reports to Premier Zhu Rongji and the State Council,
and its activities are ultimately overseen by the CCP Political
Science and Law Commission. It is not unusual for senior members
of the CCP's top leadership to be interested in the planning
of PRC military acquisitions.
The MSS conducts science and technology collection as part
of the PRC's overall efforts in this area. These MSS efforts
most often support the goals of specific PRC technology acquisition
programs, but the MSS will take advantage of any opportunity
to acquire military technology that presents itself.
The MSS relies on a network of non-professional individuals
and organizations acting outside the direct control of the intelligence
services, including scientific delegations and PRC nationals
working abroad, to collect the vast majority of the information
it seeks.
The PLA's Military Intelligence Department (MID), also known
as the Second Department of the PLA General Staff, is responsible
for military intelligence. It is currently run by PLA General
Ji Shengde, the son of a former PRC Foreign Minister. One of
the MID's substantial roles is military-related science and technology
collection.
Methods Used by the PRC To Acquire
Advanced U.S. Military Technology
Th e PRC uses a variety of approaches to acquire military
technology. These include:
· Relying
on "princelings" who exploit their military, commercial,
and political connections with high-ranking CCP and PLA leaders
to buy military technology from abroad
· Illegally
transferring U.S. military technology from third countries
· Applying
pressure on U.S. commercial companies to transfer licensable
technology illegally in joint ventures
· Exploiting
dual-use products and services for military advantage in unforeseen
ways
· Illegally
diverting licensable dual-use technology to military purposes
· Using front
companies to illegally acquire technology
· Using commercial
enterprises and other organizations as cover for technology acquisition
· Acquiring
interests in U.S. technology companies
· Covertly
conducting espionage by personnel from government ministries,
commissions, institutes, and military industries independently
of the PRC intelligence services
The last is thought to be the major method of PRC intelligence
activity in the
United States.
The PRC also tries to identify ethnic Chinese in the United
States who have access to sensitive information, and sometimes
is able to enlist their cooperation in illegal technology or
information transfers.
Finally, the PRC has been able to exploit weaknesses and lapses
in the U.S. system for monitoring the sale and export of surplus
military technology and industrial auctions.
The PRC is striving to acquire advanced technology of any
sort, whether for military or civilian purposes, as part of its
program to improve its entire economic infrastructure.29 This
broad targeting permits the effective use of a wide variety of
means to access technology. In addition, the PRC's diffuse and
multi-pronged technology-acquisition effort presents unique difficulties
for U.S. intelligence and law enforcement agencies, because the
same set of mechanisms and organizations used to collect technology
in general can be used and are used to collect military technology.
The PRC's blending of intelligence and non-intelligence assets
and reliance on different collection methods presents challenges
to U.S. agencies in meeting the threat. In short, as James Lilley,
former U.S. Ambassador to the PRC says, U.S. agencies are "going
nuts" trying to find MSS and MID links to the PRC's military
science and technology collection, when such links are buried
beneath layers of bureaucracy or do not exist at all.30
The
'Princelings'
Unlike the Soviet Union, where nepotism in the Communist Party
was rare, ruling in the PRC is a family business. Relatives of
the founders of the Chinese Communist Party rise quickly through
the ranks and assume powerful positions in the CCP, the State,
the PLA, or the business sector. These leaders, who owe their
positions more to family connections than to their own merit,
are widely known as "princelings." 31
Political, military, and business leaders in the PRC exercise
considerable influence within their respective hierarchies. With
the exception of those who make their way to the uppermost levels
of the CCP or State bureaucracies, however, their authority,
clout, and influence extend only to those below them within that
hierarchy. They have little ability to influence either the leaders
above them within their own hierarchy or the leaders in other
hierarchies.32
Princelings operate outside these structures. Because of their
family ties and personal connections to other CCP, PLA, and State
officials, they are able to "cross the lines" and accomplish
things that might not otherwise be possible.33
Two of the currently most notable princelings, Wang Jun and
Liu Chaoying, have been directly involved in illegal activities
in the United States.
Wang Jun is the
son of the late PRC President Wang Zhen. Wang simultaneously
holds two powerful positions in the PRC. He is Chairman of the
China International Trade and Investment Company (CITIC), the
most powerful and visible corporate conglomerate in the PRC.
He is also the President of Polytechnologies Corporation, an
arms-trading company and the largest and most profitable of the
corporate structures owned by the PLA. Wang's position gives
him considerable clout in the business, political, and military
hierarchies in the PRC.34
Wang is publicly known in the United States for his role in
the 1996 campaign finance scandal and for Polytechnologies' indictment
stemming from its 1996 attempt to smuggle 2,000 Chinese AK-47
assault rifles into the United States. He attended a White House
"coffee" with President Clinton in February 1996 and
was given a meeting with Commerce Secretary Ronald Brown the
following day. He was also connected to over $600,000 in illegal
campaign contributions made by Charlie Trie to the U.S. Democratic
National Committee (DNC).35
Liu Chaoying is
the daughter of former CCP Central Military Commission Vice-Chairman
and Politburo Standing Committee member General Liu Huaqing,
who has used numerous U.S. companies for sensitive technology
acquisitions. General Liu has been described as the PLA's preeminent
policymaker on military R&D, technology acquisition, and
equipment modernization as well as the most powerful military
leader in the PRC. His daughter is a Lieutenant Colonel in the
PLA and has held several key and instrumental positions in the
PRC's military industry, which is involved in numerous arms transactions
and international smuggling operations.36 On two occasions she
has entered the United States illegally and under a false identity.
Col. Liu Chaoying is currently a Vice-President of China Aerospace
International Holdings, a firm specializing in foreign technology
and military sales.37 It is the Hong Kong subsidiary of China
Aerospace Corporation, the organization that manages the PRC's
missile and space industry. Both organizations benefit from the
export of missile or satellite-related technologies and components
from the United States, as does China Great Wall Industry Corporation,
Col. Liu's former employer and a subsidiary of China Aerospace
Corporation, which provides commercial space launch services
to American satellite manufacturers.
China Aerospace Corporation is also a substantial shareholder
in both the Apstar and APMT projects to import U.S. satellites
to the PRC for launch by China Great Wall Industry Corporation.38
A Chinese-American, Johnny Chung,
during the course of plea negotiations, disclosed that during
a trip to Hong Kong in the summer of 1996, he met with Col. Liu
and the head of the MID, Gen. Ji Shengde. According to Chung,
he received $300,000 from Col. Liu and Gen. Ji as a result of
this meeting. The FBI confirmed the deposit into Chung's account
from Hong Kong and that the PLA officials likely served as the
conduit for the money.
The Select Committee determined that Col. Liu's payment to
Johnny Chung was an attempt to better position her in the United
States to acquire computer, missile, and satellite technologies.
The purpose of Col. Liu's contacts was apparently to establish
reputable ties and financing for her acquisition of technology
such as telecommunications and aircraft parts.39
Within one month after meeting with Col. Liu in Hong Kong,
Chung formed Marswell Investment, Inc., possibly capitalizing
the new company with some of the $300,000 he had received from
Col. Liu and Gen. Ji.40 Col. Liu was designated as president
of the company, which was based in Torrance, California. The
company is located in southern California, in the same city where
China Great Wall Industry Corporation also maintains its U.S.
subsidiary.
Col. Liu made two trips to the United States, one in July 1996
and one in August 1996, apparently seeking to expand her political
and commercial contacts. During Col. Liu's July trip, Chung arranged
for her to attend a DNC fundraiser where she met President Clinton
and executives involved in the import-export business.41
Shortly afterwards, Chung also arranged for her to meet with
the Executive Vice President of the Federal Reserve Bank of New
York.42
Liu's August 1996 trip to the United States came at the invitation
of Chung, who had told her that he had contacted Boeing and McDonnell
Douglas regarding her interest in purchasing aircraft parts.43
That same month, Col. Liu traveled to Washington, D.C., where
Chung had contacts arrange for her to meet with representatives
of the Securities and Exchange Commission to discuss listing
a PRC company on U.S. stock exchanges.44 Soon after the meeting,
when Chung and Liu's alleged involvement in the campaign finance
scandal became the subject of media reports, Col. Liu left the
United States. Marswell remains dormant.45
Princelings such as Wang and Liu present a unique technology
transfer threat because their multiple connections enable them
to move freely around the world and among the different bureaucracies
in the PRC. They are therefore in a position to pull together
the many resources necessary to carry out sophisticated and coordinated
technology acquisition efforts.46
Acquisition
of Military Technology from Other Governments
To fill its short-term technological
needs
military equipment, the PRC has made numerous purchases of foreign
military systems. The chief source for these systems is Russia,
but the PRC has acquired military technology from other countries
as well. Specific details on these acquisitions appear in the
Select Committee's classified report, but the Clinton administration
has determined that they cannot be made public without affecting
national security.
Russia
After years of hostile relations between the PRC and the Soviet
Union, Russia has again become the PRC's main source of advanced
weapons and has sold numerous weapon systems to the PRC.47 The
technologically-advanced weapons systems and components the PRC
either has purchased or plans to purchase from Russia include
electronic warfare and electronic eavesdropping (SIGINT) equipment,
air-to-air missiles, advanced jet fighters, attack helicopters,
attack submarines, and guided missile destroyers.48 These transfers
have been used to improve the capabilities of the PLA ground,
air, and naval forces.
Israel
Recent years have been marked by increased Sino-Israeli cooperation
on military and security matters.49 Israel has offered significant
technology cooperation to the PRC, especially in aircraft and
missile development.50 Israel has provided both weapons and technology
to the PRC, most notably to assist the PRC in developing its
F-10 fighter and airborne early-warning aircraft.51
The United States
The PRC has stolen military technology from the United States,
but until recently the United States has lawfully transferred
little to the PLA. This has been due, in part, to the sanctions
imposed by the United States in response to both the 1989 Tiananmen
Square massacre and to the PRC's 1993 transfer of missile technology
to Pakistan.
During the Cold War, the United States assisted the PRC in
avionics modernization of its jet fighters under the U.S. Peace
Pearl program.52
After the relatively "cool" period in U.S.-PRC relations
in the early 1990s, the trend since 1992 has been towards liberalization
of dual-use technology transfers to the PRC.53 Recent legal transfers
include the sale of approximately 40 gas turbine jet engines,
the sale of high performance computers, and licensed co-production
of helicopters.54
Nonetheless, the list of military-related technologies legally
transferred to the PRC directly from the United States remains
relatively small.
Illegal transfers of U.S. technology from the U.S. to the
PRC, however, have been significant.
Significant transfers of U.S. military technology have also
taken place in the mid-1990s through the re-export by Israel
of advanced technology transferred to it by the United States,
including avionics and missile guidance useful for the PLA's
F-10 fighter. Congress and several Executive agencies have also
investigated allegations that Israel has provided U.S.-origin
cruise, air-to-air, and ground-to-air missile technology to the
PRC.55
Joint
Ventures with U.S. Companies
This section describes the pressures brought to bear on U.S.
companies linked with militarily-sensitive technology attempting
to do business with the PRC, and provides examples of U.S. companies
conspiring to evade export control laws in pursuit of joint ventures.
The vast majority of commercial business activity between
the United States and the PRC does not present a threat to national
security, but additional scrutiny, discipline, and an awareness
of risks are necessary with respect to joint ventures with the
PRC where the potential exists for the transfer of militarily-sensitive
U.S. technology.
The U.S. 1997 National Science and Technology Strategy stated
that:
Sales and contracts with foreign buyers imposing conditions
leading to technology transfer, joint ventures with foreign partners
involving technology sharing and next generation development,
and foreign investments in U.S. industry create technology transfer
opportunities that may raise either economic or national security
concerns.56
The behavior of the PRC Government and PRC-controlled businesses
in dealing with U.S. companies involved with militarily sensitive
technology confirms that these concerns are valid and growing.
The growing number of joint ventures that call for technology
transfers between the PRC and U.S. firms can be expected to provide
the PRC with continued access to dual-use technologies for military
and commercial advantage.
Technology transfer requirements in joint ventures often take
the form of side agreements (sometimes referred to as offset
agreements) requiring both that the U.S. firm transfer technology
to the PRC partner, and that all transferred technology will
eventually become the property of the PRC partner.57
Although many countries
require technology transfers when they do business with U.S.
firms, no country makes such demands across as wide a variety
of industries as the PRC does.58 Despite the PRC's rapid
economic liberalization since 1978, it continues to implement
its explicitly designed goals and policies to restrict and manage
foreign investment so as to bolster the PRC's military and commercial
industries through acquisition of technology.59
The Communist Party has long believed that forcing technology
from foreign firms is not only critical to the PRC, but also
is a cost that foreign firms will bear in order to obtain PRC
market entry.
In the past, the PRC has favored joint ventures with U.S.
high-technology companies for several reasons:
· The U.S.
excels in many areas of technology that are of special interest
to the PLA and to PRC-controlled firms
· Many PRC
scientists were educated in the United States and retain valuable
contacts in the U.S. research and business community who can
be exploited for technology transfer
· Many other
countries are more reluctant than the United States to give up
technology60
The PRC has dedicated increasing resources to identifying
U.S. high-technology firms as likely targets for joint venture
overtures. Science and technology representatives in PRC embassies
abroad are used to assist in this targeting of technology, and
to encourage collaboration with U.S. firms for this purpose.
Unless they are briefed by the FBI pursuant to its National
Security Threat List program, U.S. companies are unaware of the
extent of the PRC's espionage directed against U.S. technology,
and thus - at least from the U.S. national security standpoint
- are generally unprepared for the reality of doing business
in the PRC. They lack knowledge of the interconnection between
the CCP, the PLA, the State, and the PRC-controlled companies
with which they deal directly in the negotiating process.61
The U.S. General Accounting Office (GAO) has found that U.S.
businesses have significant concerns about arbitrary licensing
requirements in the PRC that often call for increased technology
transfer. The GAO has also found that transparency was the most
frequent concern reported by U.S. companies.62 Because of the
lack of transparency in the PRC's laws, rules, and regulations
that govern business alliances, and the dearth of accessible,
understandable sources of regulatory information, U.S. businesses
are often subjected to technology transfer requirements that
are not in writing, or are not maintained in the field, or are
contained in "secret" rules that only insiders know
about.63
The PRC's massive
potential consumer market is the key factor behind the willingness
of some U.S. businesses to risk and tolerate technology transfers.
Some of these transfers could impair U.S. national security,
as in the cases of Loral and Hughes described later in this Report.
The obvious potential of the PRC market has increasingly enabled
the PRC to place technology-transfer demands on its U.S. trading
partners.
U.S. businesses believe that they must be in the PRC, lest
a competitor get a foothold first.64 In fact, many U.S. high-technology
firms believe it is more important to establish this foothold
than to make profits immediately or gain any more than limited
access to the PRC market.65 Some of the PRC's trading partners
have focused on increased technology transfers to raise the attractiveness
of their bids.
In addition to traditional types of technology transfer, many
U.S. high-technology investments in the PRC include agreements
establishing joint research and development centers or projects.
This type of agreement represents a new trend in U.S. investment
in the PRC and is a potentially significant development.66
U.S. companies involved in joint ventures may be willing to
transfer technology because they believe that the only risk is
a business one - that is, that the transfers may eventually hurt
them in terms of market share or competition.67 These businesses
may be unaware that technologies transferred to a PRC partner
will likely be shared within the PRC's industrial networks and
with the PLA, or that joint ventures may be used in some instances
as cover to acquire critical technology for the military.
COSTIND, which controls the PRC's military-industrial organizations,
likely attempts to monitor technologies through joint ventures.
In addition, U.S. businesses may be unaware that joint-venture
operations are also vulnerable to penetration by official PRC
intelligence agencies, such as the MSS.
In one 1990s case reviewed by the Select Committee, a U.S.
high-technology company and its PRC partner used a joint venture
to avoid U.S. export control laws and make a lucrative sale of
controlled equipment to the PRC. Following the denial of an export
license, the U.S. company attempted to form a joint venture to
which the technology would be transferred. The joint venture
was controlled by a PRC entity included on the U.S. Commerce
Department's Entity List, which means it presents an unacceptable
risk of diversion to the development of weapons of mass destruction.
Acquisition
and Exploitation of Dual-Use Technologies
The acquisition of advanced dual-use technology represents
yet another method by which the PRC obtains advanced technology
for military modernization from the United States. The PRC's
military modernization drive includes a policy to acquire dual-use
technologies. The PRC seeks civil technology in part in the hope
of being able to adapt the technology to military applications.
This is referred to by some analysts as "spinning on."
68
A strategy developed by the PRC in 1995 called for the acquisition
of dual-use technologies with civil and military applications,
and the transfer of R&D achievements in civil technology
to the research and production of weapons.
The PRC collects military-related science and technology information
from openly available U.S. and Western sources and military researchers.
This accelerates the PLA's military technology development by
permitting it to follow proven development options already undertaken
by U.S. and Western scientists.
PRC procurement
agents have approached U.S. firms to gain an understanding of
the uses of available technology, and to evaluate the PRC's
ability to purchase dual-use technology under the guise of civil
programs and within the constraints of U.S. export controls.
Additionally, the PRC has attempted to acquire information from
the U.S. and other countries about the design and manufacturing
of military helicopters.69 The PRC could use this approach to
acquire chemical and biological weapons technology.
The key organizations in the PRC's drive to acquire dual-use
technology include:
· COSTIND,
which acquires dual-use technology for PRC institutes and
manufacturers by assuring foreign suppliers that the technology
will be used for civil production. COSTIND uses overseas companies
to target U.S. firms for acquisition of dual-use technology for
the military.
· The Ministry
of Electronics Industry (MEI),70 which is responsible for
developing the PRC's military electronics industry. Among other
things, the Ministry approves and prioritizes research and development
and the importation of electronics technologies that can be used
to speed up the PRC's indigenous production capabilities.
· The Ministry
of Post and Telecommunications (MPT), which is acquiring
asynchronous transfer mode switches that could be used for military
purposes by the PLA.71
· PLA-operated
import-export companies, which also import dual-use technologies
for military modernization. Polytechnologies, a company attached
to the General Staff Department of the PLA, plays a major role
in this effort, especially in negotiating foreign weapons purchases.72
· The Aviation
Industries Corporation of China (AVIC), and its subsidiary, China
National Aero-Technology Import-Export Corporation (CATIC), which
have sent visitors to U.S. firms to discuss manufacturing agreements
for commercial systems that could be used to produce military
aircraft for the PLA.73 AVIC is one of five PRC state-owned conglomerates
that operate as "commercial businesses" under the direct
control of the State Council and COSTIND.
Several incidents highlight CATIC's direct role in the acquisition
of controlled U.S. technology. One clear example was CATIC's
role as the lead PRC representative in the 1994 purchase of advanced
machine tools from McDonnell Douglas, discussed more fully later
in this Report.
Another possible
example of the PRC's exploitation of civilian end-use as a means
of obtaining controlled technology was CATIC's 1983 purchase
of two U.S.-origin CFM-56 jet engines on the pretext that they
would be used to re-engine commercial aircraft. Although the
CFM-56 is a commercial engine, its core section is the same as
the core of the General Electric F-101 engine that is used in
the U.S. B-1 bomber. Because of this, restrictions were placed
on the export license. However, the PRC may have exploited the
technology of the CFM-56. When the U.S. Government subsequently
requested access to the engines, the PRC claimed they had been
destroyed in a fire.
CATIC has, on several occasions reviewed by the Select Committee,
misrepresented the proposed uses of militarily useful U.S. technology.
The Clinton administration has determined that the specific facts
in these cases may not be publicly disclosed without affecting
national security.
In 1996, AVIC, CATIC's parent company, attempted to use a
Canadian intermediary to hire former Pratt & Whitney engineers
in the United States to assist in the development of an indigenous
PRC jet engine. AVIC's initial approach was under the guise of
a civilian project, and the U.S. engineers were not told they
would be working on a military engine for the PRC's newest fighter
jet until negotiations had progressed substantially. The U.S.
engineers pulled out when they were told what they would be asked
to do.74
The degree of diversion to military programs by the PRC of
commercially-acquired technologies is unclear, since the PRC's
parallel civil-military industrial complex75 often blurs the
true end-use of technology that is acquired. As a result, there
may be more use of U.S. dual-use technology for military production
than these examples suggest.
Front
Companies
Another method by which the PRC acquires technology is through
the use of front companies. The term "front company"
has been used in a variety of ways in public reports and academic
studies in different contexts, and can include:
· U.S. subsidiaries
of PRC military-industrial corporations in the PRC
· U.S. subsidiaries
of PLA-owned-and-operated corporations
· Corporations
set up by PRC nationals overseas to conduct technology acquisition
and transfer
· Corporations
set up outside the PRC to acquire technology for a PRC intelligence
service, corporation, or institute covertly
· Corporations
set up outside the PRC by a PRC intelligence service, corporation,
or institute solely to give cover to professional or non-professional
agents who enter the United States to gather technology or for
other purposes
· Corporations
set up outside the PRC by a PRC intelligence service to launder
money
· Corporations
set up outside the PRC by a PRC intelligence service to raise
capital to fund intelligence operations
· Corporations
set up outside the PRC by a PRC individual to hide, accumulate,
or raise money for personal use
· Corporations
set up outside the PRC by organs of the PRC Government to funnel
money to key U.S. leaders for the purpose of garnering favor
and influencing the U.S. political process and U.S. Government
decision-making
The differing meanings attached to the term "front companies"
by different U.S. agencies has led to confusion, particularly
because many PRC companies fall into several different categories,
at the outset or at different times during their existence. In
addition, U.S. agencies responsible for different aspects of
national security, law enforcement, and Sino-U.S. relations often
do not share even basic data concerning PRC espionage in the
United States.
This may partly explain why, for example, in Senate testimony
on the same day in 1997, the State Department said it could identify
only two PLA companies that were doing business in the United
States, while the AFL-CIO identified at least 12, and a Washington-based
think-tank identified 20 to 30 such companies.76 The Select Committee
has determined that all three figures are far below the true
figure.
The Select Committee
has concluded that there are more than 3,000 PRC corporations
in the United States, some with links to the PLA, a State
intelligence service, or with technology targeting and acquisition
roles. The PRC's blurring of "commercial" and "intelligence"
operations presents challenges to U.S. efforts to monitor technology
transfers for national security purposes.
General Liu Huaqing, who recently retired as a member of the
Communist Party Politburo, the CCP Standing Committee, and the
Central Military Commission, was involved with dozens of companies
in Hong Kong and in Western countries engaged in illegally acquiring
advanced U.S. technology.
Yet another complicating factor is the evolution of the names
used by PRC-controlled corporations. Some corporations such as
NORINCO and Polytechnologies were easily recognizable as subsidiaries
of PRC corporations. The boards of directors of PRC companies
were also easily recognizable as PLA officers in the past.77
Recent changes, however, have made it more difficult to recognize
PRC corporations.
Some analysts note that U.S.-based subsidiaries of PLA-owned
companies in particular have stopped naming themselves after
their parent corporation, a move prompted at least in part by
criminal indictments and negative media reports that have been
generated in connection with their activities in the United States.
Many PLA-owned companies in the United States have simply ceased
to exist in the past year or so, a phenomenon that reflects these
factors as well as the fact that PRC-controlled companies often
do not make money.78
The PRC intelligence services use front companies for espionage.
These front companies may include branches of the large ministerial
corporations in the PRC, as well as small one- and two-person
establishments. Front companies, whatever the size, may have
positions for PRC intelligence service officers. PRC front companies
are often in money-making businesses that can provide cover for
intelligence personnel in the United States.
PRC front companies may be used to sponsor visits to the U.S.
by delegations that include PRC intelligence operatives.
There has been increasing PRC espionage through front companies
during the 1990s. As of the late 1990s, a significant number
of front companies with ties to PRC intelligence services were
in operation in the United States.
The PRC also uses its state-controlled "news" media
organizations to gain political influence and gather political
intelligence.
In June 1993, after
a highly-publicized trial, a former Chinese philosophy professor,
Bin Wu, and two other PRC nationals were convicted in a U.S.
court of smuggling third-generation night-vision equipment
to the PRC. Wu worked at the direction of the MSS, which he says
directed him to acquire numerous high-technology items from U.S.
companies. To accomplish these tasks, Wu and the others created
several small front companies in Norfolk, Virginia. From that
base, they solicited technology from a number of U.S. companies,
purchasing the equipment in the names of the front companies
and forwarding it to the MSS through intermediaries in
Hong Kong.79
Wu was a good example of the non-traditional PRC approach
to acquiring technology in that Wu himself was not a professional
intelligence agent. Identified as a pro-Western dissident by
the MSS just after the Tiananmen Square massacre, he was given
a choice: he could stay in the PRC and face prison, or he could
accept the MSS's offer to help him and his family by supporting
the PRC in its quest for high technology. Wu was also a "sleeper"
agent, who was initially told to go to the United States and
establish himself in the political and business community. The
MSS told Wu he would be called upon and given taskings later.80
Wu appears to have been part of a significant PRC intelligence
structure in the United States. This structure includes "sleeper"
agents, who can be used at any time but may not be tasked for
a decade or more.81
In the 1990s, the PRC has also attempted to use front companies
to acquire sensitive information on restricted military technologies,
including the Aegis combat system. The Aegis combat system uses
the AN/SPY-1 phased array radar to detect and track over 100
targets simultaneously, and a computer-based command and decision
system allowing for simultaneous operations against air, surface,
and submarine threats.82
Direct
Collection of Technology by
Non-Intelligence Agencies and Individuals
PRC intelligence agencies often operate in the U.S. commercial
environment through entities set up by other PRC Government and
commercial organizations instead of creating their own fronts.
PLA military intelligence officers do, however, operate directly
in the United States, posing as military attaches at the PRC
Embassy in Washington, D.C., and at the United Nations in New
York.
Most PRC covert collection of restricted technology in the
United States is accomplished by individuals attached to PRC
Government and commercial organizations which are unaffiliated
with official PRC intelligence services. These organizations
collect their own technology from the United States, rather than
rely on the PRC intelligence agencies to do it for them.
The Select Committee
judges that the MSS may be allowing other PRC Government entities
to use MSS assets to fulfill their intelligence needs. These
findings further illustrate that PRC "intelligence"
operations are not necessarily conducted by what are traditionally
thought of as "intelligence" agencies.
The main PLA intelligence activity in the United States is
not represented by PLA intelligence organizations, but by PRC
military industries and regular components of the PLA. Although
military-industrial corporations are not PLA-owned, they are
deeply involved in arms production and acquisition of military
technology.
The activities of CATIC and its U.S. subsidiaries exemplify
the activities carried out by PRC military-industrial companies.
Other PRC companies, such as China Great Wall Industry Corporation,
collect technology for their own use and may be used as cover
by PRC intelligence personnel.
PRC technology acquisition in the United States also is carried
out by various science and technology commissions and organizations.
COSTIND, for example, has no official U.S. subsidiary but is
the primary coordinating authority over the military-industrial
corporations that collect technology in the United States. COSTIND
also uses the "front company" device to procure high-technology
products.
The PRC State Science and Technology Commission largely oversees
civilian science and technology collection. The State Science
and Technology Commission also uses diplomats in the U.S. as
a key collection tool. It has provided funding to a PRC scientist
to establish various commercial enterprises in the U.S. as a
means of collecting technology information for distribution in
the PRC.
The State Science
and Technology Commission was involved in efforts to elicit nuclear
weapons information from a Chinese-American scientist. Science
and Technology offices in the PRC's seven diplomatic agencies
in the United States carry out a substantial portion of technology
acquisition taskings. The primary role of these offices is to
arrange contacts between PRC scientists and their American counterparts.
Various "liaison groups" constitute another PRC
technology collection vehicle in the United States. The PRC's
primary official liaison organization is the China Association
for International Exchange of Personnel (CAIEP). CAIEP operates
seven "liaison organization" offices in the United
States, including one in Washington, D.C., and one in San Francisco.
It is one of several organizations set up by the PRC to illegally
acquire technology through contacts with Western scientists and
engineers. Others include a purported technology company and
a PRC State agency.
Another significant source of the PRC's technology collection
efforts outside of its formal intelligence agencies comes from
Chinese business representatives loyal to the CCP who emigrate
to the United States. These individuals pursue commercial interests
independent of direct PRC Government control. Their primary motive
is personal financial gain, and they will sell their efforts
and opportunities to any willing consumer. When asked to do so,
they pass U.S. technology back to the PRC. The Select Committee
believes that the use of this technique is proliferating in recent
years.
The PRC also acquires advanced technology through the outright
theft of information. A few cases exemplify this method of technology
acquisition.
Peter Lee, a Taiwanese-born,
naturalized U.S. citizen who formerly worked at the Los Alamos
and Lawrence Livermore National Laboratories, passed classified
information to the PRC in 1997 and in 1985. In 1997, Lee
passed to the PRC classified U.S. developmental research on very
sensitive detection techniques that, if successfully concluded,
could be used to threaten previously invulnerable U.S. nuclear
submarines. In 1985, Lee stole for the PRC classified information
about the use of lasers to create nuclear explosions on a miniature
scale. The Lee case represents a classic non-intelligence service
operation.83 For a detailed discussion, see Chapter 2, PRC Theft
of U.S. Thermonuclear Warhead Design Information.
The Select Committee also received evidence of PRC theft of
technology data from U.S. industry during the 1990s valued at
millions of dollars. The PRC used Chinese nationals hired by
U.S. firms for that purpose. The Clinton administration has determined
that no details of this evidence may be made public without affecting
national security.
In 1993, PRC national Yen Men Kao, a North Carolina restaurant
owner, was arrested by the FBI and charged with conspiring to
steal and export classified and export-controlled high-technology
items to the PRC.84 Among the items about which Kao and several
other PRC nationals were seeking information were:
· The U.S.
Navy's Mark 48 Advanced Capability Torpedo
· The F-404
jet engine used on the U.S. F-18 Hornet fighter
· The fire-control
radar for the U.S. F-16 fighter85
The case of Kao and his co-conspirators is one of several
involving PRC commercial entities attempting to illegally acquire
U.S. technology.
The PRC also relies heavily on the use of professional scientific
visits, delegations, and exchanges to gather sensitive technology.
As the PRC Government has increasingly participated in the
world commercial and capital markets, the number of PRC representatives
entering the United States has increased dramatically. One estimate
is that in 1996 alone, more than 80,000 PRC nationals visited
the United States as part of 23,000 delegations.
Almost every PRC citizen allowed to go to the United States
as part of these delegations likely receives some type of collection
requirement, according to official sources.
Scientific delegations from the PRC are a typical method used
by the PRC to begin the process of finding U.S. joint venture
partners. These delegations have been known to go through the
motions of establishing a joint venture to garner as much information
as possible from the U.S. partner, only to pull out at the last
minute.
Scientific visits and exchanges by PRC scientists and engineers
and their U.S. counterparts create several risks to U.S. national
security. This has been a particular concern in recent years
regarding foreign visitors to the Department of Energy's national
weapons laboratories.86
The first of these risks is that visitors to U.S. scientific
and technology sites may exploit their initial, authorized access
to information to gain access to protected information.87 The
Select Committee has reviewed evidence of PRC scientists who
have circumvented U.S. restrictions on their access to sensitive
manufacturing facilities.
Another risk is that U.S. scientists may inadvertently reveal
sensitive information during professional discussions.
The PRC subjects
visiting scientists to a variety of techniques designed to elicit
information from them. One technique may involve inviting
scientists to make a presentation in an academic setting, where
repeated and increasingly sensitive questions are asked.88 Another
is to provide the visitor with sightseeing opportunities while
PRC intelligence agents burglarize the visitor's hotel room for
information. Still another technique involves subjecting the
visitor to a grueling itinerary and providing copious alcoholic
beverages so as to wear the visitor down and lower resistance
to questions.89
In one instance, a U.S. scientist traveled to the PRC where
very specific technical questions were asked. The scientist,
hesitant to answer one question directly because it called for
the revelation of sensitive information, instead provided a metaphorical
example. The scientist immediately realized that the PRC scientists
grasped what was behind the example, and knew that too much had
been said.
Another common PRC tactic is to tell U.S. visitors about the
PRC's plan for further research, the hope being that the U.S.
scientist will release information in commenting on the PRC's
plans.
The Select Committee has reviewed evidence of this technique
being applied to acquire information to assist the PRC in creating
its next generation of nuclear weapons.
Another risk inherent in scientific exchanges is that U.S. scientists
who are overseas in the PRC are prime targets for approaches
by professional and non-professional PRC organizations that would
like to co-opt them into providing assistance to the PRC. In
many cases, they are able to identify scientists whose views
might support the PRC, and whose knowledge would be of value
to PRC programs.
The Select Committee has received information about Chinese-American
scientists from U.S. nuclear weapons design laboratories being
identified in this manner.
Typically, the PRC will invite
such a scientist to lecture and, once in the PRC, question him
closely about his work. Once the scientist has returned to the
U.S., answers to follow-up questions may be delivered through
a visiting intermediary. Such efforts to co-opt scientists may
be conducted by PRC ministries, and may involve COSTIND.
The number of PRC nationals attending educational institutions
in the United States presents another opportunity for the PRC
to collect sensitive technology.90 It is estimated that at any
given time there are over 100,000 PRC nationals who are either
attending U.S. universities or have remained in the United States
after graduating from a U.S. university. These PRC nationals
provide a ready target for PRC intelligence officers and PRC
Government-controlled organizations, both while they are in the
United States and when they return to the PRC.91
The Select Committee judges that the PRC is increasingly looking
to PRC scholars who remain in the United States as assets who
have developed a network of personal contacts that can be helpful
to the PRC's search for science and technology information.
The PRC has also acquired technological information through
open forums such as arms exhibits and computer shows. During
a recent international arms exhibit, for example, PRC nationals
were observed collecting all possible forms of technical information.
This included videotaping every static display and designating
individuals to take notes. The group also stole a videocassette
from a display that was continuously playing information on the
U.S. Theater High Altitude Air Defense system, when the Defense
Department contractor left it unattended. Converting the stolen
cassette to a frame-by-frame sequence could yield valuable intelligence
information to the PRC.92
Illegal
Export of Military Technology
Purchased in the United States
The PRC is also taking advantage of the ongoing U.S. military
downsizing. In particular, PRC representatives and companies
in the United States pursue the purchase of high-technology U.S.
military surplus goods.
In a single 1996-1997 operation, the Los Angeles office of
the U.S. Customs Service seized over $36 million in excess military
property that was being shipped overseas illegally. Among the
seized U.S. military surplus equipment on its way to the PRC
and Hong Kong were:
· 37 inertial
navigation systems for the U.S. F-117 and FB-111 aircraft
· Thousands
of computers and computer disks containing classified Top Secret
and higher information
· Patriot
missile parts
· 500 electron
tubes used in the U.S. F-14 fighter
· Tank and
howitzer parts
· 26,000
encryption devices93
PRC representatives have been
the biggest buyers of sensitive electronic surplus material.
Defense Department investigators have noted a trend among the
PRC buyers of this equipment: many had worked for high-technology
companies in the PRC or for PRC Government science and technology
organizations.94
`
The PRC has been able to purchase these goods because, in its
rush to dispose of excess property, the Defense Department failed
to code properly or to disable large amounts of advanced military
equipment, allowing PRC buyers to pay for and take immediate
possession of functional high-technology equipment. Often this
equipment was purchased as "scrap," for which the buyers
paid pennies on the dollar.95
According to the U.S. Customs Service, many PRC companies
that bid on military surplus technology intentionally used "American-sounding"
names to mask their PRC affiliation.96
The PRC also has been able to exploit U.S. military downsizing
by purchasing advanced technology, in the form of machine tools
and production equipment from decommissioned U.S. defense factories,
through industrial auctions.
For example, a multi-axis machine tool profiler, designed
to build wing spans for the U.S. F-14 fighter, originally cost
over $3 million but was purchased by the PRC for under $25,000.97
According to one industrial auctioneer, the PRC frequents industrial
auctions because they offer accurate, well-maintained equipment
at bargain prices and with quick delivery.98 Moreover, once the
PRC obtains this equipment, there are ample resources available
in the United States to upgrade the equipment to modern standards.
A California company specializing in refurbishing machine
tools, for example, was approached in recent years by representatives
of CATIC's El Monte, California office. The CATIC representatives
reportedly inquired about the scope of the company's refurbishment
capability, including whether it could train CATIC people to
rebuild and maintain the machines and whether the company would
be willing to assemble the machines in the PRC. The CATIC personnel
also reportedly asked if the company could convert a three-axis
machine tool to a five-axis machine tool. They were told this
was possible for some machines, and very often only requires
replacing one computer controller with another.99
The U.S. company noted, however, that such a converted machine
would require an export license. In response, the CATIC personnel
reportedly said, rather emphatically, that they would have "no
problem" with the export. The CATIC inquiries came at about
the same time CATIC was negotiating the purchase of machine tools
from the McDonnell Douglas Columbus, Ohio plant.100
CATIC's discussions with this particular U.S. company did
not result in either the training of CATIC personnel or the conversion
of any machine tools. It is unknown, however, what other U.S.
companies were approached with similar inquiries or whether any
such inquiries resulted in technological assistance to CATIC
or the PRC.
The Select Committee reviewed evidence from the mid-1990s
of a PRC company that obtained U.S. defense manufacturing technology
for jet aircraft, knowingly failed to obtain a required export
license, and misrepresented the contents of its shipping containers
in order to get the technology out of the country. The Clinton
administration has determined that further information on this
case cannot be made public without affecting national security.
PRC
Purchase of Interests in U.S. Companies
A more recent method used by the PRC to obtain advanced technology
from the United States is through the purchase of an interest
in U.S. high-technology companies or U.S. export facilities.
While this method does not yet appear to be prevalent, it has
been identified in at least three instances.
In 1990, CATIC acquired
an interest in MAMCO Manufacturing, a Seattle, Washington,
aircraft parts manufacturer. In a highly-publicized decision
that year, President George Bush exercised his authority under
section 721 of the Defense Production Act of 1950 (also known
as the Exon-Florio provision) to order CATIC to divest itself
of the MAMCO interest based on the recommendations of the Committee
on Foreign Investment in the United States (CFIUS), an inter-agency
committee chaired by the Secretary of Treasury and tasked to
conduct reviews of foreign acquisitions that might threaten national
security.101
CFIUS concluded that:
· Some technology
used by MAMCO, although not state-of-the-art, was export-controlled
· CATIC had
close ties to the PLA through the PRC Ministry of Aviation (now
known as Aviation Industries Corporation, or AVIC)
· The acquisition
would give CATIC unique access to U.S. aerospace companies
It is likely that the PRC's strategy in acquiring MAMCO was
to give CATIC a venue from which to solicit business with U.S.
aerospace firms, both to yield revenue and to gain access to
aerospace technologies, inasmuch as CATIC has conspired to illegally
acquire U.S. sensitive technology in the past. In addition, according
to public reports, CATIC has been used for PRC arms sales to
countries such as Iran.
The PRC's efforts to acquire MAMCO did not end with President
Bush's divestiture order. CATIC requested CFIUS approval to satisfy
the concerns expressed in President Bush's divestiture order
by selling its MAMCO interest to the China International Trust
& Investment Corporation (CITIC).
CFIUS noted that CITIC reported directly to the highest level
of the PRC Government, the PRC State Council, and that CITIC
did not have any colorable business rationale for wanting to
acquire MAMCO. When CFIUS began questioning CITIC's business
purposes and its ties to the State Council, CATIC withdrew its
request.
CATIC then filed another request, this time proposing that
it meet President Bush's divestiture order by selling its MAMCO
interest to Huan-Yu Enterprises, a PRC company that was owned
by a PRC provincial government and reported to the PRC Ministry
of Electronics Industry (now known as the Ministry of Information
Industry), which in turn reported directly to the PRC State Council.
A CFIUS investigation concluded that Huan-Yu was a consumer,
not a producer, of aerospace parts and had no legitimate reason
to acquire MAMCO. The proposed divestiture looked to CFIUS like
a "sham acquisition." Faced with intense CFIUS interest,
CATIC again withdrew its filing.
In 1996, Sunbase Asia, Incorporated purchased Southwest Products
Corporation, a California producer of ball bearings for U.S.
military aircraft. Sunbase is incorporated in the United States,
but is owned by an investment group comprised of some of the
PRC's largest state-owned conglomerates as well as a Hong Kong
company. According to a Southwest executive, the purchase will
"take [Sunbase] to the next level" of technology.102
The Clinton administration has determined that additional information
on this transaction cannot be made public without affecting national
security.
China Ocean Shipping
Company (COSCO), the PRC's state-owned shipping company which
operates under the direction of the Ministry of Foreign Trade
and Economic Cooperation and answers to the PRC State Council,103
attempted to lease port space that was being vacated by the U.S.
Navy in Long Beach, California. The lease proposal led to a heated
debate between Congress, which wanted to prevent the lease based
on national security concerns, and President Clinton, who supported
the lease. Legislation passed by both houses of Congress in 1997
barred the lease and voided the President's authority to grant
a waiver.104
Other information indicates COSCO is far from benign. In 1996,
U.S. Customs agents confiscated over 2,000 assault rifles that
were being smuggled into the United States aboard COSCO ships.105
"Although presented as a commercial entity," according
to the House Task Force on Terrorism and Unconventional Warfare,
"COSCO is actually an arm of the Chinese military establishment."
The Clinton administration has determined that additional information
concerning COSCO that appears in the Select Committee's classified
Final Report cannot be made public without affecting national
security.
Methods
Used by the PRC to Export Military Technology
from the United States
Once the PRC acquires advanced technology in the United States,
it requires secure means to export the information or hardware
out of the country. Weaknesses in U.S. customs can be exploited
to smuggle classified or restricted U.S. technology.
Diplomatic pouches and traveling PRC diplomats offer another
avenue for illegal technology exports. Almost every PRC Government
commercial and diplomatic institution in the United States has
personnel who facilitate science and technology acquisitions.
The Select Committee believes that these means of communicating
with the PRC could have been exploited to smuggle nuclear weapons
secrets from the
United States.
These are some of the further means that have been used to
illegally ship sensitive technology to the PRC:
· In 1993,
Bin Wu, a PRC national, was convicted of transferring night-vision
technology to the PRC. Wu used the U.S. postal system to
get technology back to the PRC. He mailed the technology he collected
directly to the PRC, mostly through an intermediary in Hong Kong.106
· The PRC
uses false exportation documentation and has falsified end-user
certificates. In one case reviewed by the Select Committee,
the Department of Commerce reported that a U.S. subsidiary of
a PRC company used a common illegal export tactic when it falsely
identified the machine tools it was exporting. The U.S. Customs
Service also indicates that the PRC's use of false bills of sale
and false end-use statements are common illegal export tactics.
· The PRC
has used at least one commercial air carrier to assist in its
technology transfer efforts. In 1996, Hong Kong Customs officials
intercepted air-to-air missile parts being shipped by CATIC aboard
a commercial air carrier, Dragonair. Dragonair is owned by China
International Trade and Investment Company (CITIC), the most
powerful and visible PRC-controlled conglomerate, and the Civil
Aviation Administration of China (CAAC).107
· A common
PRC method for transferring U.S. technology to the PRC uses Hong
Kong as the shipment point. This method takes advantage of
the fact that U.S. export controls on Hong Kong are significantly
less restrictive than those applied to the rest of the PRC, allowing
Hong Kong far easier access to militarily-sensitive technology.
The more relaxed
controls on the export of militarily-sensitive technology to
Hong Kong have been allowed to remain in place even though Hong
Kong was absorbed by the PRC and PLA garrisons took control
of the region on July 1, 1997. U.S. trade officials report that
no inspections by the Hong Kong regional government nor by any
other government, including the United States, are permitted
when PLA vehicles cross the Hong Kong border.
Various U.S. Government analyses have raised concerns about
the risk of the diversion of sensitive U.S. technologies not
only to the PRC, but to third countries as well through Hong
Kong because of the PRC's known use of Hong Kong to obtain sensitive
technology.108 Some controlled dual-use technologies can be exported
from the United States to Hong Kong license-free, even though
they have military applications that the PRC would find attractive
for its military modernization efforts.
The Select Committee has seen indications that a sizeable
number of Hong Kong enterprises serve as cover for PRC intelligence
services, including the MSS. Therefore, it is likely that over
time, these could provide the PRC with a much greater capability
to target U.S. interests in Hong Kong.
U.S. Customs officials also concur that transshipment through
Hong Kong is a common PRC tactic for the illegal transfer of
technology.109
PRC
Incentives for U.S. Companies to
Advocate Relaxation of Export Controls
U.S. companies in the high-technology sector are eager to
access the PRC market. The PRC often requires these U.S. firms
to transfer technologies to the PRC as a precondition to market
access. U.S. export regulations can be seen as an impediment
to commercial opportunities.110
Executives wishing to do business in the PRC share a mutual
commercial interest with the PRC in minimizing export controls
on dual-use and military-related commodities. The PRC has displayed
a willingness to exploit this mutuality of interest in several
notoriously public cases by inducing VIPs from large U.S. companies
to lobby on behalf of initiatives, such as export liberalization,
on which they are aligned with the PRC.
The PRC is determined
to reduce restrictions on the export of U.S. communications satellites
for launch in the PRC. From the perspective of the PRC, provision
of such launch services creates a unique opportunity to consult
with U.S. satellite manufacturers, access information regarding
U.S. satellite technology, and obtain resources to modernize
their rockets.111 U.S. satellite manufacturers are, in turn,
anxious to access the potentially lucrative PRC market, and realize
that launching in the PRC is a potential condition to market
access.112
By agreeing to procure numerous satellites from Hughes Electronics
Co. (Hughes) and Space Systems/Loral (Loral) in the early 1990s,
the PRC created a mutuality of interest with two companies well-positioned
to advocate the liberalization of export controls on these platforms.
For example, Bernard L. Schwartz,
Chairman and CEO of Loral Space & Communications, Ltd., the
parent company of Loral, met directly on at least four occasions
with Secretary of Commerce Ron Brown after 1993, and accompanied
him on a 1994 trade mission to the PRC.113
C. Michael Armstrong, the former Chairman and Chief Executive
Officer of GM Hughes Electronics, the parent company of Hughes,
has served as Chairman of President Clinton's Export Council
since 1993, working with the Secretary of State, the Secretary
of Commerce, and others to "provide insight and counsel"
to the President on a variety of trade matters.114 Armstrong
also serves or has served as a member of the Defense Preparedness
Advisory Council, the Telecommunica-tions Advisory Council, and
the Secretary of State's Advisory Council.115
Both Armstrong and Schwartz, as well as other executives from
high-technology firms, advocated the transfer of export licensing
authority from the "more stringent control" of the
State Department to the Commerce Department. Armstrong met with
the Secretary of Defense, the National Security Advisor, and
the Secretary of State on the matter, and both Schwartz and Armstrong
co-signed a letter with Daniel Tellep of Lockheed- Martin Corporation
to the President urging this change.116 The changes they advocated
were ultimately adopted.
Between 1993 and January 3, 1999, Loral and Hughes succeeded
in obtaining waivers or export licenses for an aggregate of five
satellite projects.117
Another example
of the incentive to advocate the relaxation of export controls
involves the Charoen Pokphand Group (CP Group), Thailand's largest
multinational company and one of the largest investors in the
PRC. CP Group executives have served as economic advisors to
the PRC Government and were chosen to sit on the committees dealing
with the absorption of Hong Kong.118
The CP Group was a founding member of Asia Pacific Telecommunications
Satellite Holdings, Ltd. (APT), a consortium run by PRC-controlled
investment companies, including China Aerospace Corporation.
APT imports satellites manufactured by Hughes and Loral as part
of the Apstar program for launch in the PRC by China Great Wall
Industry Corporation.119
On June 18, 1996, several CP Group executives attended a coffee
with President Clinton at the White House. These executives included
Dhanin Chearavanont (CP Chairman and Chief Executive Officer),
Sumet Chearavanont (Vice Chairman and President), and Sarasin
Virapol (employee and translator). The CP executives were invited
to the coffee by their Washington, D.C., lobbyist, Pauline Kanchanalak.120
According to one participant, Karl Jackson of the U.S.-Thailand
Business Council, the CP executives "dominated the conversation
at the coffee." The discussion included U.S.-PRC relations,
Most-Favored-Nation trade status for the PRC, and U.S. technology.
Jackson's characterization of the role that CP executives played
at the event is corroborated by other participants.121
The PRC's Efforts to Assimilate
Advanced U.S. Military Technology
The PRC's approach to U.S. technology firms proceeds from
the premise that foreign firms should be allowed access to the
PRC market only because such access will enable the PRC to assimilate
technology, and eventually to compete with or even overtake U.S.
technology. The PRC thus views foreign firms as a short-term
means to acquire technology.
In theory, as the PRC is increasingly able to develop its
own technology, it will need less and less foreign help. In practice,
however, the PRC faces numerous challenges in integrating foreign
technology into both its civilian and military industrial bases.
Among the areas in which the PRC is particularly dependent
upon U.S. technology are computer hardware and microelectronics,
telecommunications, commercial aircraft, and machine tools. The
PRC, therefore, will most likely continue to rely heavily on
joint ventures with foreign firms to provide advanced technology
in
these areas.
There are several reasons that the PRC has absorbed and assimilated
only some, and not other, U.S. military and civilian technologies:
· The PRC's
funding of technology development, especially in applied sciences,
conflicts with other priorities, including supporting PRC
state-owned enterprises as they restructure.
· While the
PRC has targeted very sophisticated U.S. military technology,
including aerospace and electronics technology, it has not achieved
the levels of training and maintenance necessary to absorb
it. But the emphasis on acquiring the most sophisticated technologies
continues, even as some senior PRC officials call for a greater
focus on "building block" technologies.
· The PRC
has a reputation for violating intellectual property rights,
making some foreign investors hesitant to transfer their most
advanced technology.
· There is
a tendency of CCP and PLA officials to look toward their personal
gain and aggrandizement first, and only second to use State
assets for the benefit of the PRC.
The PRC has benefitted
from advanced U.S. and Western military technology in several
areas, including ground force weapons, communications, remote
sensing, and tactical and strategic systems. A 1995 study
by the Office of Technology Assessment found that the PRC's joint
ventures with the United States in commercial aircraft production
appear to have enabled the PLA to machine smoother skins on its
fighter aircraft.122 Other PRC military products, such as air-to-air
and surface-to-air missiles, submarines, and short-range ballistic
missiles, also appear to have benefitted from foreign technical
help.123
The PRC has also succeeded in reverse-engineering military
hardware acquired from the United States and other countries,
thereby defraying the high cost of weapons development. For example:
· During
the 1980s and 1990s, the PRC is presumed to have diverted U.S.
military technology through civilian programs. In 1983, the
PRC is presumed to have exploited the CFM-56 jet engine technology
from a civilian program. The CFM-56 contains the same core section
as the engine used in the B-1B bomber.
· The PRC
developed its Z-11 helicopter by reverse-engineering the
French Aerospatiale AS-350 Ecureuil helicopter.124
· The PRC's
C-801 anti-ship cruise missile is believed to be a copy of
the French Exocet anti-ship cruise missile.125
PRC scientists have been pressured to reverse-engineer U.S.
high technology rather than purchase it, even though this means
that it may be difficult to maintain because of the lack of service,
training, and documentation.
For example, the PRC was able to reverse-engineer a high-performance
computer and produce a copy for far less than the U.S. equipment
would have cost. By the time they achieved this success, however,
a commercially-available desktop computer with the same power
could have been purchased for a small fraction of their costs
in time, money, and effort. The PRC seems willing to pay this
cost in order to avoid long-term dependence on U.S. technology.
The Select Committee judges that at least some of the PRC's
statements about its technical progress are distorted so as to
increase the PRC's ability to gain access to foreign technology.
By claiming substantial indigenous progress in areas ranging
from supercomputers to stealth technology, the PRC can allay
foreign fears that providing it with advanced technology will
improve the PRC's capabilities. This tactic was used, the Select
Committee believes, to overcome U.S. and Western objections to
transfers of high performance computers to the PRC.
The Select Committee's classified report includes further
material details and examples of PRC acquisition of advanced
U.S. military technology, which the Clinton administration has
determined cannot be made public without affecting national security.
U.S. Government Monitoring
Of PRC Technology Acquisition Efforts
In the United States
Because of the historical counterintelligence focus on the
Soviet Union throughout the decades of the Cold War, the U.S.
Government has never made the PRC's technology acquisition activities
in the United States a priority. Moreover, because of the breadth
of the PRC's decentralized collection efforts, the U.S. Government
cannot completely monitor PRC activities in the United States.
Neither the Department of Commerce, the Department of the
Treasury, the Federal Bureau of Investigation, the Central Intelligence
Agency, nor, apparently, the Department of Defense126 has in
place a program, system, or effort specifically tasked with the
ongoing collection of information concerning the following:
· Efforts by
the PRC, or by commercial entities owned or controlled by the
PRC, to merge with, acquire a controlling interest in, or form
a commercial partnership or joint venture with, commercial entities
in the United States
· Efforts
by the PRC, or by commercial entities owned or controlled by
the PRC, to establish commercial entities in the United States
· Efforts
by the PRC, by commercial entities owned or controlled by the
PRC, or by agents thereof, directly or indirectly, to identify,
locate, or acquire advanced technologies from U.S. sources
· Commercial
connections or interactions between U.S. companies and commercial
entities owned or controlled by the PRC, specifically including
connection or interaction involving advanced technologies
· Commercial
affiliations (for example, as officer, director, employee) between
PRC nationals and either U.S. or foreign owned or controlled
commercial entities
Each of the U.S. Government's departments and agencies with responsibilities
in this area has reported to the Select Committee that it is
monitoring some aspects of PRC commercial activity in the United
States, but that such monitoring is usually narrow in focus or
reactive in nature. There is little or no initiative taken; rather,
attention is paid to PRC commercial activity only when an allegation,
problem, or issue arises that demands attention.
Because the CIA is not authorized to conduct broad collection
activities within the United States, it defers to the FBI on
the matter of PRC interaction with U.S. companies domestically.
But there is little or no coordination within the U.S. Government
of counterintelligence that is conducted against the PRC-directed
efforts to acquire sensitive U.S. technology.
The Department of
Commerce has contracted with private entities to produce
an assessment of the PRC's technology acquisition efforts. In
addition, three Commerce Department bureaus have duties that
relate to PRC commercial activities in the United States. Specific
activities in this regard include: 127
· Commerce
contracted with DFI International to do research and write a
report on the issue of technology transfers to the PRC through
commercial joint ventures.
· Commerce
also contracted with DFI International to establish a database
of information on technology transfers from U.S. and foreign
firms in the aerospace and telecommunications industries.
This project will produce periodic reports summarizing trends
and analyzing implications of technology transfer on national
security and international trade policy.
· The Bureau
of Economic Analysis collects and publishes significant data
for statistical purposes regarding foreign direct investment
in the United States. More specifically, BEA collects data
needed to prepare the U.S. balance of payments and international
investment position, financial and operating data regarding foreign-owned
U.S. companies, and data on U.S. businesses that have been newly-acquired
or established by foreign investors. BEA does not have any direct
information on the acquisition of advanced technologies by the
PRC.
· The Bureau
of Export Administration controls the licensing of exports of
dual-use goods and technologies pursuant to the Export Administration
Act and the Export Administration Regulations. The Bureau
develops export control policies, issues export licenses, and
prosecutes violators. The Bureau's controls include the regulation
of the export of specified goods and technology to the PRC, including
the transfer of controlled technology to PRC nationals in the
United States.
· The Bureau
of Export Administration, along with the Customs Service, is
also responsible for investigating possible violations of the
Export Administration Act and the Export Administration Regulations,
including possible improper transfers of technology to PRC nationals
in the United States. While the Bureau may obtain information
during an investigation concerning commercial activities of PRC
nationals, that information is not the focus of the investigation
and is not collected in a manner that permits aggregation of
data.128
The Treasury Department
has an indirect role in monitoring PRC commercial activities
in the United States. Through the Customs Service, Treasury investigates
violations of U.S. export laws. These investigations are not
part of a PRC-specific monitoring process, but are carried out
based on specific facts indicating a violation of U.S. laws.129
In addition, any commercial entity, whether from the PRC or any
other country, that wants to acquire control of a savings-and-loan
or a national bank must file an application with Treasury's Office
of Thrift Supervision or the Office of the Comptroller of the
Currency.130
Treasury also chairs the Committee on Foreign Investment in
the United States (CFIUS), an inter-agency committee to which
the President has delegated the authority to review and investigate
foreign investment transactions and conduct investigations pursuant
to the Exon-Florio provision of the Omnibus Trade and Competitiveness
Act of 1988. CFIUS membership includes the Secretaries of the
Treasury, Commerce, Defense, and State, as well as the Attorney
General, the United States Trade Representative, the Chairman
of the Council of Economic Advisors, the Director of the Office
of Management and Budget, the Director of the Office of Science
and Technology Policy, the Assistant to the President for National
Security Affairs, and the Assistant to the President for Economic
Policy. Other agencies are asked to participate when a transaction
falls within their areas of expertise.131
Notification to CFIUS of a proposed transaction is voluntary.
The statute does not provide for the targeting of specific countries.
If the transaction involves a foreign entity that is controlled
by or is acting on behalf of a foreign government and the transaction
could affect national security, a formal 45-day investigation
is required. At the conclusion of an investigation, CFIUS submits
a report and recommendations to the President.
The Securities and
Exchange Commission collects little information helpful in
monitoring PRC commercial activities in the United States. This
lack of information is due only in part to the fact that many
PRC front companies are privately-held and ultimately - if indirectly
- wholly-owned by the PRC and the CCP itself. Increasingly, the
PRC is using U.S. capital markets both as a source of central
government funding for military and commercial development and
as a means of cloaking U.S. technology acquisition efforts by
its front companies with a patina of regularity and respectability.132
Chapter 1 Notes
1 In practice, it is just as accurate to say the PRC
Government is made up of just two bureaucracies (since the PLA
is actually the "fist" of the CCP), or even one bureaucracy
(since both the PLA and the State are subservient to the CCP).
The distinctions between are them largely artificial. For general
information on this topic. See CRS Report, "Chinese Government
Structure and Function, Policies on Military and Industrial Modernization,
and Technology Acquisition," November 10, 1998; Kenneth
Lieberthal, Governing China, W.W. Norton & Company, Inc.,
1995.
2 The Politburo currently has 22 members and two alternates.
3 See Constitution of the People's Republic of China,
Articles 2, 3.
4 Lieberthal, Governing China, refers to this technique
as "interlocking directorates."
5 PRC Constitution, Article 29.
6 Jienfangjun Bao, Beijing, July 30, 1997, as cited in
the BBC Summary of World Broadcasts, August 8, 1997.
7 Leading Groups are a key mechanism for policy coordination
and decision-making in the PRC. They are comprised of senior
Communist Party, State, and PLA officials with relevant expertise
and authority for specified areas. See generally, CRS Chinese
Government Structure.
8 The State Science and Technology Commission was recently
dissolved and replaced by the newly-formed Ministry of Science
and Technology.
9 Deba R. Mohanty, "Hidden Players in Policy Processes:
Examining China's National Security Research Bureaucracy,"
Institute for Defense Studies and Analysis, July 1998.
10 For the official report on this program, see "Decade-Long
Hi-Tech Program Bears Fruit," Xinhua News Agency, September
27, 1996.
11 Su Kuoshan, "Road of Hope-Reviewing the Accomplishment
of the '863' Project on the 10th Anniversary of its Implementation,"
Jiefangjun Bao, April 5, 1996, reproduced in Foreign Broadcast
Information Service, Daily Report, May 8, 1996, FBIS-CHI-96-089.
12 Major Mark Stokes, "China's Strategic Modernization:
Implications for U.S. National Security," USAF Institute
for National Security Studies, July, 1998.
13 Cui Ning, "Hi-Tech Projects Highlight Five Areas,"
China Daily, April 3, 1996; in FBIS. See also Ding Hennggao,
COSTIND Director, speech delivered on March 28, 1996, "Review
of the 863 Plan over the Past Ten Years"; Stokes.
14 John Frankenstein and Bates Gill, "Current and
Future Challenges Facing Chinese Defense Industries," China
Quarterly, June 1996.
15 See Frankenstein and Gill, ibid; "Future Military
Capabilities and Strategy of the People's Republic of China,
"Department of Defense Report to Congress, 1998 Report;
Letter from RADM Mike Ratliff, USN to JCS (J2), 9 November 1998,
transmitted to the Select Committee November, 24, 1998.
16 Frankenstein and Gill.
17 Testimony of Dr. Michael Pillsbury before the Senate
Select Committee on Intelligence, September 18, 1997.
18 BBC Summary of World Broadcasts, Far East, 11 November
1992.
19 For open source discussion, see Richard Fisher, "Foreign
Arms Acquisition and PLA Modernization," Heritage Foundation,
June 1, 1998.
20 Ibid.
21 James Mulvenon, "Chinese Military Commerce and
U.S. National Security," RAND, July, 1997: Greg Mastel,
"A China the World Could Bank On," Washington Post,
December 29, 1997.
22 Wei Ke, "Army Re-Tools Commercial Production,"
China Daily August 17-23, 1997; in FBIS.
23 John Frankenstein and Bates Gill, "Current and
Future Challenges Facing Chinese Defense Industries," China
Quarterly, June 1996. See also Zalmay Khalizad, Abram Shulsky,
Daniel Byman, Roger Cliff, David Orletsky, David Shlapak, Michael
Swaine, and Ashley Tellis, "Chinese Military Modernization
and Its Implications for the U.S. Air Force (draft)," RAND,
October, 1998.
24 See Frankenstein and Gill.
25 The National People's Congress is a putative legislature,
and officially China's supreme body of State power. It officially
elects the State Council. Recent evidence suggests the National
People's Congress has an increasing role in policy deliberation.
Kenneth Lieberthal, Governing China, W.W. Norton & Company,
Inc., 1995.
26 Li Peng, "Report on the Outline of the Ninth Five-Year
Plan for National Economic and Social Development and Long-Range
Objectives to the Year 2010," delivered to the Fourth Session
of the Eighth National People's Congress on March 5, 1996.
27 BBS Summary of World Broadcasts, April 7, 1997.
28 "China's National Defense," Information Office,
PRC State Council, July 27, 1998.
29 Testimony of Nicholas Eftimiades, October 15, 1998.
30 Interview of James Lilley, November 17, 1998.
31 These individuals often jump many bureaucratic levels
to take their positions. Tai Ming Cheung, See, e.g.,"China's
Princelings," Kim Eng Securities, January 1995; Murray Scot
Tanner and Michael Feder, "Family Politics, Elite Recruitment,
and Succession in Post-Mao China," Australian Journal of
Chinese Affairs, July 1993.
32 Interview of James Mulvenon, October 16, 1998.
33 See Murray Scot Tanner and Michael Feder, "Family
Politics, Elite Recruitment, and Succession in Post-Mao China,"
Australian Journal of Chinese Affairs, July 1993. Frankenstein
and Gill.
34 James Mulvenon, "Chinese Military Commerce and
U.S. National Security," RAND, July 1997; David Jackson,
"U.S. Probes Whether Beijing Gave Money to Influence Policy,"
Chicago Tribune, February 14, 1997.
35 Ibid.
36 Tracy Connor, "New Asiagate Figure Has Military
History," New York Post, November 7, 1998.
37 Interim Report of the House Government Reform and Oversight
Committee ("HGROC Report") Chapter IV C.
38 Deposition of Shen Jun before the Select Committtee
(Dec. 8, 1998); Japanese Firms Buy Into Satellite Telephone Co.,
Information Access Newsbytes (July 9, 1996).
39 See generally, "Liu's Deals with Chung: An Intercontinental
Puzzle," David Jackson and Lena H. Sun, Washington Post,
May 24, 1998.
40 Interim Report of the House Government Reform and Oversight
Committee ("HGROC Report") Chapter IV C.
41 Ibid.
42 Ibid.
43 Ibid.
44 "Red Face Over China; Did a Chinese plot persuade
Clinton to let a U.S. company give China its rocket science?
No. Politics (and policy) did," Eric Pooley et. al., Time,
June 1, 1998.
45 Interim Report of the House Government Reform and Oversight
Committee ("HGROC Report") Chapter IV C. "Liu's
Deals with Chung: An Intercontinental Puzzle," David Jackson
and Lena H. Sun, Washington Post, May 24, 1998.
46 Testimony of James Mulvenon, RAND, before the Select
Committee (Oct. 15, 1998); John Frankenstein and Bates Gill,
"Current and Future Challenges Facing Chinese Defense Industries,"
China Quarterly (June 1996).
47 Bates Gill and Taeho Kim, "China's Arms Acquisitions
from Abroad, A Quest for Superb and Secret Weapons," Stockholm
International Peace Institute, Oxford University Press, 1995.
48 Richard Fisher, "Foreign Arms Acquisition and
PLA Modernization," Heritage Foundation, June 1, 1998. See
also Bates Gill and Taeho Kim, "China's Arms Acquisitions
from Abroad, A Quest for Superb and Secret Weapons," Stockholm
International Peace Institute, Oxford University Press, 1995.
49 Bates Gill and Taeho Kim, "China's Arms Acquisitions
from Abroad, A Quest for Superb and Secret Weapons," Stockholm
International Peace Institute, Oxford University Press, 1995.
50 Ibid.
51 "Worldwide Challenges to Naval Strike Warfare,"
Office of Naval Intelligence, March 1997; "Information Warfare
Grips China," Damon Bristow, Jane's Intelligence Review-
Pointer, November 1, 1998.
52 Bates Gill and Taeho Kim, "China's Arms Acquisitions
from Abroad, A Quest for Superb and Secret Weapons," Stockholm
International Peace Institute, Oxford University Press, 1995.
53 Ibid.
54 For a more detailed discussion of the jet engine acquisition,
see Chapter 10, Manufacturing Processes; Bates Gill and Taeho
Kim.
55 Shawn L. Twing, "Congress Calls for Sanctions
if Israeli Technology Transfer to China is Proven," The
Washington Report, November/December 1996. See also Bates Gill
and Taeho Kim, "China's Arms Acquisitions from Abroad, A
Quest for Superb and Secret Weapons," Stockholm International
Peace Institute, Oxford University Press, 1995; Tony Capaccio,
"Israeli Arms Transfers of U.S. Technology Remain and Abrasive
Issue," Defense Week, June 5, 1995.
56 "The National Security Science and Technology
Strategy," U.S. Office of Science and Technology Policy,
1996.
57 Kathleen Walsh, "U.S. Technology Transfers to
the People's Republic of China," DFI International, December,
1997.
58 Paul Blustein, "China Plays Rough: Invest and
Transfer Technology, or No Market Access," Washington Post,
October 25, 1997.
59 Kathleen Walsh, December, 1997.
60 Walsh, December, 1997, (stating the United States is
"somewhere in the middle" among countries in its willingness
to transfer technology).
61 Testimony of Nicholas Eftimiades, October 15, 1998.
62 See "Challenges and Opportunities for U.S. Businesses
in China," testimony of JayEtta Hecker, GAO, before the
Committee on Banking and Financial Services, U.S. House of Representatives,
July 29, 1996.
63 Interview of John Foarde, September 23, 1998.
64 See, e.g., Walsh, December, 1997; Letter to the Select
Committee from Sandra Taylor, Vice-President, Eastman Kodak Company,
November 18, 1998.
65 Walsh, December 1997. See also Joseph Kahn, "McDonnell's
Hopes in China Never Got Off the Ground," The Wall Street
Journal, May 22, 1996 (quoting McDonnell's President as saying
it should do "whatever it takes" to "carve out
a place" in China).
66 Walsh Testimony and Letter to the Select Committee
from Sandra Taylor, Vice-President, Eastman Kodak Company, November
18, 1998.
67 Letter to the Select Committee from Sandra Taylor,
Vice-President, Eastman Kodak Company, November 18, 1998.
68 See John Frankenstein, "China's Defense Industries:
A New Course?" The Chinese concept of a "spin-on"
is in marked contrast to the "spin-off" approach of
the U.S. at the end of the Cold War, where the goal was to convert
military technology to commercial uses.
69 "News Digest," Helicopter News, March 28,
1997. "The Z-11 is a reverse-engineered copy of Eurocopter's
single-engined Ecureuil."
70 This Ministry is now known as the Ministry of Information
Industry.
71 "Sale of Telecommunications Equipment to China,"
Karen Zuckerstein, David Trimble, and John Neumann, General Accounting
Office, November 1996.
72 Testimony of James Mulvenon, October 15, 1998.
73 See the Manufacturing processes chapter for examples
of CATIC's involvement in this process.
74 Interview of Tom Nangle, October 8, 1998.
75 Almost all Chinese military production lines are co-located
with civil/commercial production lines.
76 "Commercial Activities of China's People's Liberation
Army (PLA)," Hearing Before the Committee on Foreign Relations,
United States Senate, November 6, 1997.
77 Testimony of James Mulvenon, October 15, 1998.
78 Ibid.
79 Interview of Bin Wu, October 20, 1998. See also John
Fialka, "War by Other Means," W.W. Norton and Co.,
New York (1997).
80 Ibid.
81 Ibid.
82 "Aegis Combat System," United States Navy
Fact File.
83 See Chapter 2, "PRC Theft of U.S. Thermonuclear
Weapons Design Information," for a more detailed discussion
of the Peter Lee and other espionage cases.
84 Ronald Ostrow, "FBI Arrests Chinese National in
Spy Ring Investigation," Los Angeles Times, December 5,
1993: Bill Gertz, "Spy Sting Gets Chinese Man Deported,"
The Washington Times, December 22, 1993.
85 Ibid.
86 "DOE Needs to Improve Controls Over Foreign Visitors
to Weapons Laboratories," Gary L. Jones et. al., General
Accounting Office, September 1997.
87 Ibid.
88 "Chinese Spies Just as Active as Soviets Ever
Were, FBI Says," Ruth Sinai, Associated Press, March 9,
1992. Statements in article are attributed to Patrick Watson,
the FBI's Deputy Assistant Director for Intelligence.
89 Testimony of Nicholas Eftimiades, October 15, 1998.
90 "Chinese Intelligence Operations," Nicholas
Eftimiades, Naval Institute Press, 1994.
91 Ibid.
92 "Chinese spy openly at weapons fair," Kenneth
R. Timmerman, The Washington Times, March 24, 1997.
93 "Department of Defense Disposition of Government
Surplus Items," hearing before the Senate Judiciary Subcommittee
on Administrative Oversight and the Courts, July 8, 1997; "Defense
Inventory: Action Needed to Avoid Inappropriate Sales of Surplus
Parts," General Accounting Office, August, 1998; "On
the Introduction of The Arms Surplus Reform Act of 1997,"
statement by Rep. Pete Stark in the U.S. House of Representatives,
October 1, 1997.
94 Ibid.
95 Ibid.
96 U.S. Customs briefing to Select Committee Staff, October
28, 1998. In response to this situation, in October 1997, Representative
Pete Stark introduced H.R. 2602, the Arms Surplus Reform Act
of 1997, to place a moratorium on all surplus arms sales until
DOD certified to Congress that steps had been taken to correct
weaknesses in the surplus sales program. The Act did not pass,
but a section was added to the Defense Authorization Act for
Fiscal Year 1998, Pub. L. 105-85, Sec. 1067, requiring similar
steps. The DOD submitted its report to Congress in June, 1998,
identifying problem areas and steps taken to address them.
97 Robert Greenberger, "Let's Make a Deal: Chinese
Find Bargains in Defense Equipment as Firms Unload Assets,"
Wall Street Journal, October 21, 1998; Dr. Stephen Bryen and
Michael Ledeen, "China-Related Challenges," Heterodoxy,
April/May 1997 (Submission for the record by Rep. Tillie Fowler
in the U.S. House of Representatives, June 26, 1997).
98 Robert Levy, President, Norman Levy Associates, as
quoted in Robert Greenberger, "Let's Make a Deal: Chinese
Find Bargains in Defense Equipment as Firms Unload Assets,"
Wall Street Journal, October 21, 1998.
99 Interview of Jerry Remick, October 8, 1998; Interview
of David Duquette, October 14, 1998. In a response to written
interrogatories, officials of CATIC, USA denied it was aware
of the existence of the U.S. company. Letter to Daniel Silver
from Barbara Van Gelder, October 22, 1998.
100 A more detailed summary of the CATIC purchase of McDonnell
Douglas machine tools appears at Chapter 10.
101 "Message to the Congress on the China National
Aero-Technology Import and Export Corporation Divestiture of
MAMCO Manufacturing, Incorporated," The White House, February
1, 1990.
102 Bruce Einhorn, "The China Connection," Business
Week, August 5, 1996: "Sunbase Asia Acquires Specialty Bearing
Company," PR Newswire, January 17, 1996.
103 Briefing by U.S. Treasury Department to Select Committee
staff, October 29, 1998.
104 See, e.g., Stan Crock, "China and the U.S.: The
Sparks May Start Flying," Business Week, November 16, 1998;
Robert Little, "Controversial Carrier," The Baltimore
Sun, November 8, 1998.
105 See, e.g., Timothy Maier, "Long March Reaches
Long Beach," Insight, September 8, 1997.
106 Interview of Wu Bin, October 20, 1998.
107 Bruce Smith, "Dragonair Misstep," Aviation
Week and Space Technology, September 16, 1996; "Michael
Mecham, "China Expands Stake in Cathay, Dragonair,"
Aviation Week and Space Technology, May 6, 1996.
108 See, e.g., "Hong Kong's Reversion to China: Effective
Monitoring Critical to Assess U.S. Nonproliferation Risks,"
GAO, May, 1997.
109 U.S. Customs briefing to Select Committee Staff, October
28, 1998.
110 Kathleen A. Walsh, "U.S. Technology Transfers
to the People's Republic of China," 1997.
111 Testimony of Loren Thompson, Clayton Mowry and Ray
Williamson, November 13, 1998; deposition of C. Michael Armstrong,
November 17, 1998.
112 Deposition of Bernard L. Schwartz, November 21, 1998;
testimony of Clayton Mowry, November 13, 1998.
113 Deposition of Bernard L. Schwartz, November 21, 1998.
114 Deposition of C. Michael Armstrong, December 17, 1998.
115 Ibid.
116 Deposition of C. Michael Armstrong, December 17, 1998;
letter from C. Michael Armstrong, Bernard L. Schwartz, and Daniel
Tellep to the President, October 6, 1995.
117 Aerospace Industries Association, "Presidential
Satellite Waivers and Other Related Launch Information"
(http://www.aia-aerospace.org/homepage/china_table1), October
26, 1998.
118 Far Eastern Economic Review, January 23, 1997.
119 Deposition of Bansang Lee, November 16, 1998. CP divested
itself of its holdings in APT in late 1997. See Jonathan Sprague
and Julian Gearing Bangkok, "Past Ambitions Catch Up To
Charoen Pokphand," Asiaweek, May15, 1998.
120 SCGA Report.
121 Testimony of Karl Jackson before the SCGA, September
16, 1997; testimony of Clark Southall Wallace before the SCGA,
September 16, 1997; testimony of Beth Dozoretz before the SCGA,
September 16, 1997.
122 "Other Approaches to Civil-Military Integration:
the Chinese and Japanese Arms Industries," Office of Technology
Assessment, Congress of the United States, March, 1995.
123 Richard Fisher, "Foreign Arms Acquisition and
PLA Modernization," Heritage Foundation, June 1, 1998.
124 "News Digest," Helicopter News, March 28,
1997. "The Z-11 is a reverse-engineered copy of Eurocopter's
single-engined Ecureuil."
125 "Briefing- Air-to-Ground Missile Programs,"
Jane's Defense Weekly, September 8, 1998.
126 The Department of Defense failed to respond to the
Select Committee's inquiry of September 22, 1998 in this regard.
127 Letter to Chairman Christopher Cox from William Reinsch,
Department of Commerce, October 22, 1998; Letter to Chairman
Christopher Cox from General Counsel, Department of Commerce,
October 21, 1998.
128 BEA collects information concerning investment in
U.S. businesses in which a foreign person holds an ownership
interest of ten percent or more. Pursuant to federal law, the
FDIUS data that BEA collects is confidential, and individual
company data, including the names of survey respondents, cannot
be released or disclosed in such a manner that the person or
firm that furnished the information can be specifically identified.
Use of an individual company's data for investigative purposes
is prohibited, as the data can only be used for statistical and
analytical purposes.
129 Letter to Chairman Christopher Cox from Linda Robertson,
Department of the Treasury, October 29, 1998.
130 Ibid.
131 Briefing by U.S. Treasury Department to Select Committee
Staff, October 29, 1998. See also Letter to Chairman Christopher
Cox from Linda Robertson, Department of the Treasury, October
29, 1998.
132 Letter to Chairman Christopher Cox from Susan Ochs,
SEC, September 18, 1998; Briefing by SEC to Select Committee
Staff, October 16, 1998.
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